In a severe blow to the quest to recover funds for the benefit of victims of Bernard Madoff's $50 billion Ponzi scheme, a New York federal judge threw out $20 billion of common law claims that the court-appointed trustee had asserted against banking giants JP Morgan Chase & Co. ("JP Morgan") and UBS AG ("UBS"). In granting the motions to dismiss previously filed by JP Morgan and UBS, United States District Judge Colleen McMahon ruled that court-appointed trustee Irving Picard lacked standing to assert common-law claims, including allegations of aiding and abetting fraud and breach of fiduciary duty, on behalf of victims of Madoff's fraud.
To put the magnitude of the dismissal in context, the $20 billion in dismissed claims, combined with the $9 billion dismissal of claims by Judge Rakoff against HSBC in late-July, is over three times the amount of funds recovered thus far by Picard and his legal team and nearly double the amount of principal estimated lost by Madoff victims. Picard estimated that he has recovered approximately $8.6 billion to date out of approximately $17 billion in valid customer claims.
In the decision, Judge McMahon echoed Judge Rakoff's reasoning in his dismissal of common-law claims against HSBC that Picard lacked the standing, and was thus legally prevented from bringing claims, to sue on behalf of former customers of Madoff's brokerage firm Bernard L. Madoff Investment Services ("BLMIS"). Thus, Picard can only assert claims in his capacity as trustee of the bankruptcy estate of BLMIS. Rationalizing her decision, Judge McMahon stated that:
giving the Trustee the power to pursue claims on behalf of creditors would usurp the creditors' right to determine whether and in what forum to vindicate their legal injuries.
In an interesting analogy, Judge McMahon drew parallels between Picard's attempt to sue Madoff for damages on behalf of his victims to the situation of a parking garage owner attempting to assert claims on behalf of a car that suffered damage while in traffic and before it entered the garage. Like Picard, she stated, the garage would have no legal standing to pursue recovery for the injury sustained before the car entered the garage.
Picard will most likely appeal Judge McMahon's decision to the Second Circuit Court of Appeals simply due to the amount potentially at stake. He has already declared his intention to seek review of Judge Rakoff's July decision dismissing similar claims against HSBC.
Assuming that Picard does not succeed with his planned appeal, the dismissal of common-law claims leaves the only remaining avenue of recovery against JP Morgan and UBS in federal bankruptcy claims, of which $425 million is sought from JP Morgan and $1 billion from UBS. Because the remaining claims solely concern issues of bankruptcy law, they will be transferred back to federal bankruptcy court before United States Bankruptcy Judge Burton R. Lifland.